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Experiments on compound risk in relation to simple risk and to ambiguity

Author

Listed:
  • Mohammed Abdellaoui

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Peter Klibanoff

    (Kellogg [Northwestern] - Kellogg School of Management [Northwestern University, Evanston] - Northwestern University [Evanston])

  • Laetitia Placido

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

We conduct experiments measuring individual behavior under compound risk, simple risk, and ambiguity. We focus on (1) treatment of compound risks relative to simple risks and (2) the relationship between compound risk attitudes and ambiguity attitudes. We find that compound risks are valued differently than corresponding reduced simple risks. These differences measure compound risk attitudes. These attitudes display more aversion as the reduced probability of the winning event increases. Like Halevy [Halevy Y (2007) Ellsberg revisited: An experimental study. Econometrica 75:503-536], we find an association between compound risk reduction and ambiguity neutrality. However, in contrast to the almost perfect identification in Halevy's data, we find a substantially weaker relation in both directions. First, a majority of our ambiguity-neutral subjects fail to reduce compound risk. Second, almost a quarter of our subjects who reduce compound risk are nonneutral to ambiguity. All of the latter come from the more quantitatively sophisticated part of our subject pool.

Suggested Citation

  • Mohammed Abdellaoui & Peter Klibanoff & Laetitia Placido, 2015. "Experiments on compound risk in relation to simple risk and to ambiguity," Post-Print hal-01301618, HAL.
    • Handle: RePEc:hal:journl:hal-01301618
    DOI: 10.1287/mnsc.2014.1953
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